The average tenure of a CEO declined to 8.4 years in 2011 from approximately 10 years in 2000, according to the 2012 edition of CEO Succession Practices, a new report by The Conference Board, the global business research and membership organization.

CEO Succession Practices documents and analyzes succession events for CEOs in S&P 500 companies in 2011. It includes historical comparisons with data from the last decade and a review of findings from a survey of general counsel and corporate secretaries at more than 330 U.S. public companies.

“The stronger independence and accountability of directors registered during the last decade and increased scrutiny from shareholders and activists might motivate corporate boards to be more inclined to dismiss a CEO who is performing below expectations,” said Matteo Tonello, Managing Director of Corporate Leadership at The Conference Board and co-author of the report with Jason Schloetzer, Assistant Professor at the McDonough School of Business at Georgetown University, and Melissa Aguilar, a researcher in the corporate leadership department at The Conference Board. “In addition, the pressure of serving as the CEO of a large company in an increasingly competitive global marketplace could contribute to voluntarily shorter tenures, suggesting that CEOs are leaving on their own terms after fewer years in the position.”

The lower-than-average tenure recorded in 2003 (7.4 years) may have been related to the U.S. recession following September 11, 2001, and an increase in widely publicized accounting scandals.

Following are some of the key findings described in the 2012 edition of the report. To access the report, visit www.conference-board.org/CEOsuccession2012.

CEO succession rate
In 2011, 55 CEOs in the S&P 500 left their post. The rate of CEO succession was 10.8 percent, consistent with the average number of annual succession announcements from 2000 through 2010.

Company performance and CEO age as determinants
The probability of CEO succession is higher following poor performance. In the 2000–2010 period, the succession rate of CEOs of poorly performing companies averaged 14.0 percent, ranging from a high of 21.2 percent to a low of 10.0 percent. In 2011, the succession rate of CEOs of poorly performing companies was consistent with the prior trend at 12.7 percent. The succession rate of CEOs of better performing companies varied from 6.5 percent to 11.6 percent during the 2000-2010 period, averaging, 9.7 percent. In 2011, the succession rate of CEOs of better performing companies was 10.3 percent.

The probability of CEO succession is also higher for CEOs who are at least 64 years of age. In the 2000–2011 period, the succession rate of CEOs who were at least 64 years old ranged from 29.0 percent to 9.4 percent (on average, 18.4 percent over the period), while the succession rate of younger CEOs ranged from 8.3 percent to 13.4 percent (on average, 10.1 percent over the period). The rate of CEO succession for younger CEOs is remarkably consistent across the sample.

CEO dismissal rates
CEO dismissal rates vary across the 2000–2011 period, ranging from a high of 40.0 percent in 2002 to a low of 16.2 percent in 2005 (on average, 28.2 percent for the period). Despite that variance, the rate of CEO dismissals for the 2000–2005 period, at 28.6 percent, is similar to the rate for the 2006–2011 period, at 27.9 percent. Since 2008, which roughly coincides with the beginning of the financial crisis, 28.6 percent of all succession events were associated with CEO dismissals.

Inside promotions and outside hires
Consistent with a continuing trend in the hiring of outsiders that has been recorded since the 1970s, 19.2 percent of successions in 2011 involved an outsider CEO appointment.

Joint election as board chairman
Only 19.2 percent of the 55 successions in 2011 involved the immediate joint appointment of an individual as CEO and chairman of the board of directors. Based on reviewed succession announcements, the majority of departing CEOs remained as board chairman for at least a brief transition period, typically until the next shareholder meeting.

“Anticipating a change in CEO and understanding the succession process can often be a challenge for market participants,” said Jason Schloetzer. “Fifty percent of CEO succession announcements from S&P 500 companies in 2011 were effective immediately, while two-thirds of announcements fail to provide market participants with a clear window into the board’s process of selecting the successor CEO.”

“Interestingly, the tendency to appoint a seasoned executive as incoming CEO is related to firm performance,” noted Melissa Aguilar. “The data shows better-performing companies appointed seasoned executives—those with tenure in the company exceeding 20 years—far more frequently than their poor-performing counterparts.”

The printing of the report was possible thanks to the generous support of RHR International and Latham & Watkins LLP.

Source: CEO Succession Practices: 2012 Edition,
Report R-1492-12-RR, The Conference Board.